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Three Conversations

Bruce Krasting's picture


Three Conversations

Courtesy of Bruce Krasting

I’ve had some interesting conversations in the past few days with folks whose opinions I consider important. I'm passing them on:



I spoke with my Greek shipper friend from Athens about the upcoming May 6 election. This is an event that should be feared by the markets according to this person.

There are two large political groups that have been the basis of coalition governments in Greece. On the right is the New Democracy party; on the left is the Pan Hellenic Socialist Movement. Both of these parties are out of favor today. The most recent polls show that the two parties together would get less than 40% of the popular vote. If this is the result, it will be very difficult to put a new governing coalition together.

There are many other smaller political parties that will get the dissenting votes. At this point it is unclear who will end up with the bargaining chips post-election. The fear is that some of the smaller parties will have a big say in the outcome. My friend had this to say:

“The other parties are communists, radicals and crazies. If they have a hand in the new government, then on May 7 Greece will be forced to take dramatic steps. The whole idea that the country should suffer, so the bankers can get paid would have to change.”


“Remember the history. After WWII there were years of fighting in the streets of Athens with the Communists. British troops were forced to come in to end the fighting.” If the Communists make a comeback in this election, then instability will follow.

“Also on May 7, the attitude in Brussels and Bonn towards Athens will change as well!”

May 7th is sixteen trading days from today….

British troops on the
 streets of Athens in 1948.


I spoke with a guy I’ve know for a long time who lives in Paris. He is an ex-banker, turned technocrat.


The bond market has been forcing every decision by Paris, Bonn and Brussels. Every step taken has been done to make peace with bondholders. There are many who are tired of this process. The most recent effort to bring stability and support to this market has been the LTRO. As of today, this program has not succeeded. It is unlikely that it will be repeated.



Yes, the LTRO worked for less than two months. But absent a stabilization program like the LTRO or direct market purchase of bonds by the ECB, what is plan B?



There are no good answers to this. One option would be for the ECB/IMF to make a guarantee that the annual working capital requirements of Spain, Ireland Portugal and, if necessary, Italy are met. The promise of financing would include trade deficits and interest payments. It would not cover maturing debt obligations. As debt came due, holders would be offered new three-year notes at an attractive yield. They would be forced to keep their feet in the fire.



Something like this would destroy the EU bond markets!



They are already destroyed. They only exist because the Northern countries have provided so much support. It is a mirage that there is a true market any longer.



But what you describe would be a default. Existing bonds would collapse in price.



Yes, but why does this matter? In some ways it would be a good thing. If Spanish bonds trade at 50 cents on the Euro, then the market is doing the job for us. The strong countries and the IMF can buy up the debt, with that comes a restructuring with lower principal. This happened to some extent in Greece.



But wouldn’t this wreck the banks?



Why? The banks would accept new bonds in exchange for maturing ones. They would be forced to. If they did not, they would suffer an immediate loss. So the banks and their accountants would voluntarily extend the maturities without loss. The countries involved would have the necessary access to fresh debt to cover all interest. There would be no default on interest payments. No one ever expected the debt to be paid off. It never will be. But the countries can afford to pay reasonable interest.



But what about holdouts and lawsuits?



Yes this is an issue. And yes this would be messy. But what are the options? Continuing as we have been is not acceptable. The bond markets have reacted with hostility toward the EU countries, it is not surprising to see the countries becoming hostile to the bond markets. Either there is peace, or there is war. The status quo is unacceptable. We have tried to make peace. That has not worked. Other options must be considered.



What you describe would be a dramatic shift in policy. Do you really think that what you suggest could actually happen?



The answer to this question lies with France. As of today the French/German efforts at saving Europe have failed. The French people are tired of the process. You will see this emotion in the coming national election. Even if Sarkozy wins the election, his ability to push for additional risk sharing with the South will be lost.


Without France’s active participation in the bailouts, the process will have to end. Again, many of us are sick and tired of doing what the bond market tells us we must do. There is a limit. Many think that the limit has already been exceeded. This is especially true in France. The bailouts and special lending efforts will not last for one more year.



I don’t buy into this line of thinking (at least for the time being). What is described is something that could only happen in a worst-case scenario.

His mindset is very interesting. He’s pissed at the bond market, and he’s tired of it. He left me with the impression that he was not alone in being pissed.

This is perfectly understandable. For years the poor politicians, bureaucrats and technocrats have been scrambling to appease the fucking bond market. They’ve paid a big price so far. And it hasn’t paid off. The bond market is still their primary problem.

At some point someone will say (sort of) “Fuck the fucking bond market”. We’re getting closer by the day.



My friend who has been running hedge fund money for years had this to say:

“Nat Gas could go to zero. Gas is a byproduct of drilling for oil. With US oil still worth $100+ a barrel, the drilling will continue, and more gas will be the result.”


“There are many things that are changing due to the cheap Nat. gas. Companies that are running short haul truck routes out of central locations are converting to gas. Chemical companies that use natural gas as a feedstock are seeing new opportunities. The first new ethylene plant (plastic from natural gas) in many years will be built in Oklahoma. This plant was going to be built in Mexico, but cheap gas has brought it back home.”


“The near zero cost of natural gas will transform energy use in America over the next five years.”

I’m not sure I believe in this “miracle” story just yet. But coming from this guy, the conversation has me wondering.


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Sat, 04/14/2012 - 03:46 | 2344011 malek
malek's picture

At some point someone will say (sort of) “Fuck the fucking bond market”.

That is a deceptive statement (by design?)

Because it is not the bond market getting fucked, but much more credibility, accounting rules, and rule of law, if the rant of that technocrat is put into practice.
I despise such people talking total bullshit but still not have the balls to state the obvious: Hey, let's just force extension of all maturities to 1000 years - and the banks can still keep them on their books at par!

Thu, 04/12/2012 - 23:24 | 2340548 rosiescenario
rosiescenario's picture

The natural gas situation is going to create some very interesting opportunities for many companies. Already we are seeing domestic coal prices impacted as electric utilities employ more nat gas for generation. We will also see more urban truck fleets convert to nat gas from diesel or gasoline. A nat gas powered car makes far more sense than either an all electric vehicle or a hybrid, unless the hybrid is using nat gas. Nat gas powered cars can be re-filled at home from a gas utility line using a fairly simple small compressor. Tank pressures are simialr to those used in scuba cylinders....so this is not a major problem to solve. Conversion of gasoline engines to nat gas is alo a fairly straightforward proposition. Another interesting factor in using nat gas is that you only need to do an annual oil change rather than every 4,000 miles, since nat gas burns cleaner.


Nitrogen fertilizer prices will be lower as nat gas in the major variable cost in making these. That is good for ag. U.S. glass producers will become more competitive versus foreign ones who pay far higher prices for nat gas. Companies making nat gas fired electric generating plants will see increasing sales.


As more uses for nat gas arise due to its lower costs, the pipeline companies should benefit from increased volumes being transported.


While part of the reason there is more gas available now is due to increased oil drilling, the main reason is due to new fields such as Bakken and others which have aded plentiful, long term reserves.



Fri, 04/13/2012 - 00:00 | 2340640 Flakmeister
Flakmeister's picture

You did notice TNH..... to say that they have done well with collapsing NG prices is an understatement...

Sorry... got to call BS on your Bakken statement...Not much NG comes from the Bakken as shown here...

2nd to last fig here http://www.theoildrum.com/node/8914

The glut in gas is because of the desperate grab for any form of liquids coming out of shales.... And only the wet plays have any hope of generating adequate cash flows at these NG prices..

And despite all this gas, the US is *still* a net importer...

Thu, 04/12/2012 - 23:20 | 2340535 One eyed man
One eyed man's picture

Why is it that the communists, radicals, and crazies are the ones who are arguing for the only rational thing for Greece to do under the current circumstances, which is to abandon the euro?

It is amazing to me that the two parties that got Greece into its current mess would still be able to get more than 30% of the vote. To my way of thinking, they should be in prison, not in government!, Maybe the communists, radicals, and crazies will do something about that too.

The situation in Greece somewhat reminds me of the situation in Russia in the first world war where first the Czar, then the democratic government tried to continue the war even though it had become deeply unpopular. This left the way open for the communists who wanted to end the war.

Thu, 04/12/2012 - 22:43 | 2340417 Lux Fiat
Lux Fiat's picture

Bruce, thanks for a very interesting article.

I wonder if Facebook and it's underwriters will move up the IPO date to something this side of May 6.  If they do, it would be one heck of a tell.  If not, business as usual and LTRO 3 and QE4 on deck?

Thu, 04/12/2012 - 21:24 | 2340170 vegas
vegas's picture

My observations: 1) When you say Greeks, I hear Gypsies. Of course nobody is ever going to be paid back; why do you think they joined the Eurozone to begin with? From day one they have been living off the good credit of the north and racking up the bill with no plan to evah pay the principal back - that's Brussels problem. 2) I'm fucking tired of the fucking French for being fucking tired. Fuck 'em and let 'em surrender - that's what they are really good at. 3) I make natural gas for free every day - why shouldn't it be at 0?



Thu, 04/12/2012 - 21:24 | 2340148 SillySalesmanQu...
SillySalesmanQuestion's picture

Another great post Bruce! I agree with your friend in France...fuck the bond market. When will "the market", bond issuers, banks, individual private equity funds realize that there is RISK involved in any financial transaction. Whether it be bonds, loans, investments...why do the taxpayers HAVE TO make lenders of any resort whole when their deals go bad...? I fail to see the recent logic of citizens having to backstop central banks, goverments, and all other finacial institutions. SCREW the bond market!

Rember Louis XVI and Marie Antoinette

Thu, 04/12/2012 - 22:49 | 2340431 Orly
Orly's picture

Let them eat static.

Thu, 04/12/2012 - 21:06 | 2340125 Rainman
Rainman's picture

Excellent piece on Grease, Bruce. I'll wager Singer's EMC is working that distressed debt real hard too.


Thu, 04/12/2012 - 20:56 | 2340108 FinalCollapse
FinalCollapse's picture

I wonder what the Greek military is thinking...

Thu, 04/12/2012 - 21:47 | 2340235 Northeaster
Northeaster's picture


A bunch of conscripts that don't want to be in uniform. If they can, they leave the country to avoid service.

Thu, 04/12/2012 - 23:13 | 2340516 LowProfile
LowProfile's picture


Thu, 04/12/2012 - 21:01 | 2340115 besnook
besnook's picture

depends upon whether they are still being paid.

Thu, 04/12/2012 - 20:56 | 2340106 Flakmeister
Flakmeister's picture

An awesome pairs trade for me has been HGT and TNH.... Terra is now trading north of $280.. I have prints as low as 82...

Thu, 04/12/2012 - 20:56 | 2340084 besnook
besnook's picture

the euro 99% have more balls then the usa 99%. they know violence is the only answer as it always has been historically.


infinity bonds priced at zirp is the solution. it keeps the banks books whole but resets the game. the perfect mirage of stability.

nat gas is in the boom part of the boom and bust cycle. pretty soon all that fracking going on will not be profitable and the frackers will go bust.

Thu, 04/12/2012 - 20:47 | 2340082 Arnold Ziffel
Arnold Ziffel's picture

Annette Alejandro just emerged from bankruptcy and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail.

“Even I wouldn’t make a loan to me at this point,” Ms. Alejandro said.



Thu, 04/12/2012 - 20:39 | 2340062 withnmeans
withnmeans's picture

Bruce, I too have friends in France. There are some underlying issues going on there, as Mr. Sarkozy had said earlier about the emigrants being a problem.

I don't know which one they fear worse, the Financial Collapse or the vast amount of Illegals running around. I was there last summer "not the first time", every time I go back the emigrant problem gets worse.

France has several issues to deal with, but if you get to travel the other countries that the border, you will find Italy is in very bad shape. Spain, well Spain has her problems too, however they at least put on a good front. Not so in Italia, don't get me wrong, I love Italy. You can see it in their faces, and their infrastructure is in bad shape.

Good article, it pays to know people on the outside.... You can find truth there!

Thu, 04/12/2012 - 20:37 | 2340059 onlooker
onlooker's picture

Stunning input Bruce.



They are already destroyed. They only exist because the Northern countries have provided so much support. It is a mirage that there is a true market any longer.””


--Stunning to say the least—

Thu, 04/12/2012 - 22:27 | 2340349 Lux Fiat
Lux Fiat's picture

Bruce may be channelling Soros. 

On Edward Harrison's site, he quotes a Globe and Mail article,

"George Soros, who knows a thing or two about finances, likens the threats to Europe and the United States to that of the dying days of the Soviet regime.

"Something similar is happening in the West," Mr. Soros told Bloomberg Television.  "You had a financial crisis where the market did actually collapse, but it was kept alive by the authorities.  People don't realize that the system has actually collapsed."



I'm not one for massive resets, and social chaos, but when the people who profited from massive fraud which nearly destroyed the financial system (or did, if you believe Soros), continue to remain in positions of power and profit, and the system continues to try to sweep criminal activity under the rug versus addressing the problems, I find it hard to see how it deserves to continue.


Thu, 04/12/2012 - 22:20 | 2340338 CrazyCooter
CrazyCooter's picture

My favorite nugget was this ...

Why? The banks would accept new bonds in exchange for maturing ones. They would be forced to. If they did not, they would suffer an immediate loss. So the banks and their accountants would voluntarily extend the maturities without loss.

Mirage indeed!



Thu, 04/12/2012 - 20:24 | 2340013 LetThemEatRand
LetThemEatRand's picture

“The other parties are communists, radicals and crazies. If they have a hand in the new government, then on May 7 Greece will be forced to take dramatic steps. The whole idea that the country should suffer, so the bankers can get paid would have to change.”

So the only political parties that don't want to sacrifice the financial health of society as a whole in favor of the bankers who created and profited from the crisis are "communists, radicals and crazies."  That says a lot about why we're all in this mess, doesn't it.

Fri, 04/13/2012 - 06:15 | 2340983 bank guy in Brussels
bank guy in Brussels's picture

Bruce, seems like your Greek friend didn't see the laughable contradiction in his own words. On the one hand, he says that the popular parties in Greece now are:

« ... communists, radicals and crazies ... »

But the policy of these supposed 'crazies' is:

« ... dramatic steps. The whole idea that the country should suffer, so the bankers can get paid would have to change. »

In other words, the people your Greek friend calls 'crazies', want to support the common people, and terminate the policy of lifelong debt-slave servitude to foreign bankers?

That doesn't sound 'crazy' ... that sounds like good, rational politics to me.

Thu, 04/12/2012 - 22:08 | 2340304 Lux Fiat
Lux Fiat's picture

When the main political parties abandon the tradition of rule of law in their respective countries, sentient individuals can no longer support them, even when the alternatives are not exactly appealing.

Not sure how much "airplay" the following clip of Irish journalist Vincent Browne questioning the entire premise of the Irish bailout has received, but the world needs many more people with this level of common sense and the willingness to voice it.


Thu, 04/12/2012 - 22:17 | 2340329 CrazyCooter
CrazyCooter's picture

Does your hedge friend buddy really think NatGas prices are staying low? Everything I have seen indicates the companies in the shale fracking space are binging on debt and now have to keep borrowing to keep drilling to keep the cash flow coming ... but the prices are killing them.

I rant on an older thread here:


Your friend is right, NatGas is a byproduct of Bakken/Ealge Ford tight oil, but NatGas is very often a byproduct of ANY oil production. They have devices and systems to burn it because its not economical to ship. So, this nees a lot more qualification before the conclusion can be drawn.

The bulk of the supply on the market right now is from companies who are fracking specifically for natural gas. That will come to an end, and like the oil industry has always done since its inception, the boom will bust.





Thu, 04/12/2012 - 22:38 | 2340393 Lux Fiat
Lux Fiat's picture


I'm assuming you meant to query Bruce vs. my imaginary hedge fund buddies.


Lux "Captain Obvious" Fiat

Thu, 04/12/2012 - 23:19 | 2340534 CrazyCooter
CrazyCooter's picture

I see, perhaps it was poor forum ettiquette. I just grabbed a spot up thread and dumped some thoughts regarding BKs post. You are correct I was completely off topic regarding your post. I get so used to seeing this behavior in many threads, I didn't think much about it.

Perhaps I should have found a home downthread.



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